Layoffs: There's a Right Way

By Rob Enderle
Jul 21, 2014 6:47 AM PT

Microsoft last week announced a
large staff reduction tied to the acquisition of Nokia. There is actually a science to how to make layoffs, but much of that appears to have been lost over the last couple of decades.

I have some theories as to why (I blame the Democrats and financial analysts) but how you carry out job cuts actually is very important, and it reflects how well the CEO understands people, which I think is a critical skill. In the context of Microsoft's layoffs, I'll offer a layoff primer this week.

I'll close with my product of the week, Carchex -- a critical service when buying a car. I actually had a bad experience with it, but I'll explain why I now recommend it.

When It Comes to Layoffs

Layoffs are the last resort of incompetent management except when carried out as part of a merger, acquisition or turnaround. I say that with some authority, as I spent a great deal of my education in a course of study called "Manpower Management," or the science of managing people.

Much like the science of software and hardware looks at how things interrelate to create complex structures, Manpower Management looked at how the interrelationships of people could be optimized to create far more successful companies. At the core of this effort was skill matching, and because minorities often didn't have the requisite skills due to a lack of qualified education, many of the science and practices were tossed out.

In the U.S., this resulted from adoption of the Equal Employment Opportunity Act, which was one of the most stupid political efforts I've ever seen, largely because it focused on the symptoms and not the cause -- education inequality.

CEOs are evaluated by quarterly financial performance, which forces the ones working at public companies to use layoffs as a tactic for immediately enhancing the bottom line, to get both a figurative pat on the back and a substantial monetary reward for the practice. I've become a bigger fan of private companies as a result.

Layoffs are potential company killers, largely because they aren't done surgically. That means you are far more likely to lose a critical resource, become unviable as a company and experience long-term damage. Here's a look at some examples.

IBM's Story

Louis Gerstner, long credited with turning IBM around, actually handled the big layoff right. The rule is you cut sharply, you cut deep, and that immediately puts the company back in growth mode. That focuses people back on the job, and the method he used was foundational to the success of his effort.

However, one of the biggest revenue generators for IBM at the time was the AS400 -- a mid-range computer that was carrying much of the hardware revenue load. The layoff removed people critical to manufacturing the product, and the lines shut down. That forced a panicked rehiring of some pretty pissed-off people.

Even though Gerstner generally is held up as an example of how to make cuts the right way, the nonsurgical nature of the effort nearly pushed IBM over the edge.

The HP Fiasco

Carly Fiorina is probably the standing example of how not to make layoffs. She was the CEO hired by HP to "shake the company up," and she did that. However, she clearly had no clue when it came to layoffs -- instead of cutting once deeply and moving on, she carried out lots of layoffs.

She actually had a decent vision for the firm, but by turning so often to layoffs, she lost the loyalty of the employees, and HP entered what appeared to be a death spiral. Ironically, she was replaced by Mark Hurd, whose performance actually was worse -- and he didn't have the vision part.

Carly ran for office in the same state that HP is headquartered in and lost the election by a number that was very similar to the number of folks who had grown to hate her at HP. Hurd actually had his tires slashed at his prior job for similar behavior. Both CEOs were fired for different reasons, but the lack of employee loyalty likely contributed somewhat to their eventual outcomes.

The Problems With Layoffs - Particularly Bad Ones

There really is very little good about a layoff from the standpoint of the employees. However, some can be far worse than others. Bad layoffs tend to alienate the employees and can push the company into a death spiral.

They are very disruptive -- particularly if they take a long time to execute -- because a large percentage of the firm is focused on finding a new job, and likely not that happy with the company, while still being employed to accomplish a task.

Those employees have little loyalty to the company that is letting them go, and many are anticipating dire financial straits. They have a tendency to complain about how they are being treated -- but even if they don't, they'll make the employees who are staying uncomfortable.

A lot of intellectual property leaks and thefts happen during a layoff, and there is a high probability that one or more of the unhappy employees will get violent, come to work intoxicated, or do something really stupid that damages the company. This is why the best practice remains to cut deep and fast so the pain is minimized.

Wrapping Up: Microsoft's Layoffs, and Whether to Stay or Go

How a company makes layoffs tells you a lot about how good its senior managers are, and whether they care about their people. CEOs who make lots of layoffs -- particularly those who flaunt their personal wealth at the same time -- are company killers, and you would be better served working someplace else.

As far as Microsoft goes, I've been impressed so far with Nadella's execution. While this layoff isn't as crisp as I'd like it to be, he does have to work through tough European regulations, and there will have to be a shutdown process for manufacturing, which can add substantially to the time this takes.

Nadella's history at Microsoft has been strong, and his employees both seem to respect him and like working for him. If I were at Microsoft, I'd likely stay -- but my view from outside probably isn't the same as that of anyone inside, and it is the inside view that is more important.

Product of the Week: Carchex

Now it isn't often I recommend a product after having a bad experience with it; in fact, I think this is the first time, so I'd better explain.

I made a risky car purchase earlier this month, and because it was a remote, I relied on three services: CarGurus to identify the car; CarFax to run an initial report; and Carchex to physically check on the car.

CarGurus didn't identify the car as salvage but did flag it as risky. CarFax did identify it as a salvage car (a car that has been totaled by an insurance company) but CarFax didn't specify the full extent of the damage -- or more important, what actually was fixed (the configuration I was looking for was rare). That made Carchex, which sends out a mechanic, critical.

I got a bad mechanic -- I'm pretty sure he was blind -- and the end result was that I paid more for the car than I otherwise would have. I'm always curious why something happens, though, and I spent time with the CEO of Carchex to get an understanding the process it uses and understand its exposure.

The service subcontracts mechanics to get nationwide coverage. That means that from time to time, it will get a lemon, but I now know how to protect against that. Given that the service is really reasonable (less than US$200), it is more than worth it if done right. If you know what to look for, you can tell whether someone did the job properly or not. If the mechanic didn't -- and if Carchex doesn't catch it (the company now has a much stronger process to do that) -- you can call, and it will send someone else.

So here is the trick: If you get a report that doesn't have comments and where you can't tell detail from the pictures, then someone phoned it in, and you should alert Carchex. A typical report has lots of detailed pictures and comments on most every page.

With that caveat, for anyone who buys cars out of state or out of the area, a service like Carchex is invaluable, and that's why it's my product of the week. Despite my own initial experience, based on the follow-up, I actually both recommend and will use the service again.

Sometimes how a company handles a problem defines it better than whether it has a problem in the first place. Rather than yelling at me, Carchex focused on making my experience unique -- and that, my friends, is a customer support best practice.

Rob Enderle is a TechNewsWorld columnist and the principal analyst for the
Enderle Group, a consultancy that focuses on personal technology products and trends. You can connect with him on
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